Nvidia Corporation (NASDAQ:NVDA) stock continues to soar. On Friday, NVDA’s stock price cleared $200 for the first time. Nvidia shares have nearly doubled just since early May, adding roughly $57 billion in market cap in the process. With NVDA earnings on tap for next week, there’s the potential for more gains.
Some level of optimism makes sense. Nvidia’s opportunities in gaming and automotive suggest years of revenue and profit growth. Last month, James Brumley highlighted the company’s edge in artificial intelligence as well. With chip stocks showing significant strength (even long-stagnant Intel Corporation (NASDAQ:INTC) has gotten in on the act of late), NVDA news seems to be nothing but good.
And yet, valuation and competition questions persist, as I argued a few weeks ago. Of course, NVDA has gained more than 10% since that article, as the stock continues to make a fool of anyone who questions it. At some point, however, the bull run has to come to an end, right?
Are NVDA Earnings a Trap?
InvestorPlace columnist Bret Kenwell asked on Thursday if the post-earnings plunge at Advanced Micro Devices, Inc. (NASDAQ:AMD) might suggest a similar pullback for Nvidia stock after NVDA earnings on November 9. It’s a question worth asking.
NVDA did fall 2%+ on Wednesday in sympathy with AMD, which fell double digits after weak guidance for Q4. And there’s some reason to be concerned about Nvidia stock after reviewing the AMD report.
For one, AMD guided for “some leveling off,” as CEO Dr. Lisa Su put it on the Q3 conference call, of cryptocurrency mining demand. That demand has benefited GPU sales for both AMD and Nvidia, a tailwind that might be moderating. Secondly, AMD’s GPU business had a record quarter in Q3, which might suggest that its Radeon cards are taking share from market leader NVDA.
But there was one piece of good news for Nvidia (and AMD) on the Q3 call. Su cited “significantly improved” selling prices for GPUs as a driver of that company’s record sales. That suggests that both the category is growing and that AMD isn’t yet trying to significantly undercut Nvidia on price.
That’s important. One of the most attractive features of Nvidia’s business model is its exceptional margin profile. And one of the key concerns raised by AMD’s improved competitive position in gaming — far and away the most important business for Nvidia, at least at the moment — was of a potential pricing war, or at least pricing pressure. Without that headwind, there’s less reason to see a profit miss for Nvidia in Q3 earnings, and less reason to predict a post-earnings pullback.
How Much More Upside Is Left for Nvidia Stock?
All told, the quick bounce back in NVDA stock on Thursday and Friday makes some sense. But from a long-term standpoint, the valuation here still looks dicey. The Nvidia stock price today suggests a forward multiple of about 48x, even backing out the $6 per share or so in net cash on the balance sheet.
That’s simply a huge multiple, and it raises the question of just how much Nvidia has to grow simply to meet current expectations. Chip stocks, given their cyclical nature, traditionally receive lower earnings multiples than other tech stocks. (See Micron Technology, Inc. (NASDAQ:MU) for an extreme example; even Cypress Semiconductor Corporation (NASDAQ:CY) trades at less than 14x earnings.) Investors at the moment are ignoring that fact and perhaps rightly so.
After all, the datacenter and automotive businesses both are targeting new markets with years, if not decades, of growth ahead. How the AI market will play out is anyone’s guess, but Nvidia by all accounts has a large head start in that space as well. That secular growth potential more than offsets any cyclical concerns.
Fundamentals aside, it’s a hugely attractive story. In all of the major tech stories of the next 5-10 years — AI, self-driving cars, Internet of Things — Nvidia will have a major role to play. And as long as investors keep that outlook, it’s increasingly difficult to see valuation concerns or a single quarter’s earnings really making a dent in the stock.
I do worry about the valuation, but that leaves me on the side of investors who have missed out on staggering gains based on the same concerns. And as long as Nvidia is executing and the long-term story remains intact, those skeptics likely will be left even further behind. The NVDA stock price today may look stretched. But given all the good NVDA news, the stock will have plenty of time to grow into that price, and then some.
As of this writing, Vince Martin has no positions in any securities mentioned.
